Align Technology Inc (ALGN) — Q2 2022 Earnings Call Transcript

Good afternoon, and thank you for joining us. I'm Shirley Stacy, Vice President of Corporate Communications and Investor Relations. Joining me for today’s call is Joe Hogan, President and CEO; and John Morici, CFO. We issued second quarter 2022 financial results today via Business Wire, which is available on our website at investor.aligntech.com. Today’s conference call is being audio webcast and will be archived on our website for approximately one month. A telephone replay will be available today by approximately 5:30 PM Eastern Time through 5:30 PM Eastern Time on August 10. To access the telephone replay, domestic callers should dial 866-813-9403 with access code 137829. International callers should dial 929-458-6194 using the same access code. As a reminder, the information provided and discussed today will include forward-looking statements, including statements about Align’s future events and product outlook. These forward-looking statements are only predictions and involve risks and uncertainties that are described in more detail in our most recent periodic reports filed with the Securities and Exchange Commission available on our website and at sec.gov. Actual results may vary significantly and Align expressly assumes no obligation to update any forward-looking statement. We have posted historical financial statements, including the corresponding reconciliations, including our GAAP to non-GAAP reconciliation, if applicable, and our second quarter 2022 conference call slides on our website under quarterly results. Please refer to these files for more detailed information. And with that, I'd like to turn the call over to Align Technology's President and CEO, Joe Hogan. Joe?

Thanks, Shirley. Good afternoon, and thanks for joining us. On our call today, I'll provide an overview of our Q2 results and discuss the performance of our two operating segments, Systems and Services and Clear Aligners. John will provide more detail on our financial performance and our view for the remainder of the year. Following that, I'll come back and summarize a few key points and open the call to questions. I'm pleased to report solid second quarter results with top line revenues relatively unchanged from Q1, and an operating margin of approximately 20%, despite unfavorable foreign exchange. The underlying market for orthodontics continues to be impacted by macroeconomic environment factors and lingering effects of COVID-19 variants in certain markets. Notwithstanding, these headwinds, we've remained focused on achieving our strategic initiatives, including opening new offices in the Middle East and Africa, our new manufacturing facility in Poland, launching new solutions to better support the way our customers want to do business, such as a doctor subscription program and teen case packs, and announcing new products and innovations to help our doctors and their patients. These new innovations are revolutionizing the digital treatment planning and helping to drive the evolution of digital orthodontics and comprehensive dentistry. Align is well-positioned to withstand the current market conditions to lead the digital revolution in orthodontics and dentistry as the environment and growth trends improve. For Systems and Services, Q2 revenues were up 4.7% sequentially and up slightly year-over-year compared to Q2 2021 year-over-year growth of 215%. Q2 Services and Systems revenues increased sequentially driven by scanner volume growth in the Americas and APAC, partially offset by lower volume in EMEA and an unfavorable impact from foreign exchange. The iTero Element 5D imaging system continues to represent the majority of our scanner volume as doctors recognize the benefits of going digital. In APAC, the iTero entry-level Flex scanner offering was up sequentially in Q2, reflecting increased adoption. I'm also pleased with sequentially increasing services revenues in Q2, reflecting growth from the installed base. Services revenues represent approximately 40% of our Systems and Services business. For our Clear Aligner segment, Q2 revenues were down slightly sequentially and down 5.1% year-over-year compared to our Q2 2021 record year-over-year revenue growth of 182%. For the quarter, Q2 Clear Aligner volumes reflect sequential growth across the Americas and parts of EMEA, partially offset by China and UK Q2 Invisalign case starts for teens and younger patients was 177,300, up slightly sequentially and down 2.1% year-over-year compared to last year when our Teen case shipment growth rate was an all-time high. For Q2, Invisalign First for kids as young as six years old grew year-over-year and was strong across all regions. During Q2, we introduced Invisalign Teen Packs in the US, Canada, and France. Teen Packs, our new subscription program, enables orthodontists to buy clear aligners and packs in advance, similar to the way they buy wires and brackets today. Our Teen Case Pack simplifies the ordering process and makes the billing more predictable for doctors. Teen Case Packs also include exclusive practice development benefits with the Invisalign brand and requires an incremental volume commitment from doctors. To date, enrollment has been encouraging with early adoptions highest among doctors who have not historically used Invisalign aligners to treat their teen patients. For other non-case revenues, which include retention products such as Vivera Retainers, clinical training and education, accessories, e-commerce and our new subscription programs such as our DSP, revenues were up both sequentially and year-over-year. For retainers, Q2 shipments had strong momentum with sequential and year-over-year growth across all regions driven by both submitters and utilization. Momentum in our doctor subscription program continued and Q2 revenues increased over 60% sequentially. Now let's turn to the specifics around our second quarter results, starting with the Americas. For the Americas region, Q2 Invisalign case volumes were up sequentially, reflecting increased submissions from the orthodontic channel and increased utilization from the GP channel. From a product standpoint, Q2 sequential Invisalign case growth reflects increases in both comprehensive and non-comprehensive products, including Invisalign First and Invisalign Moderate. Q2 also benefited from increased utilization in the DSO channel. Our international Clear Aligners, Q2 Invisalign case volumes were down 1.7% sequentially, primarily due to the headwinds described previously. For EMEA, Q2 Invisalign case volumes were down slightly primarily reflecting a slight increase in Iberia and Italy, offset primarily by slightly lower sequential volumes in the UK and France. For Q2, expansion market shipments declined sequentially. Q2 Invisalign teen patients increased sequentially driven by an increase in the number of doctors submitting teen cases. Turning to APAC, Invisalign case volumes were down slightly, reflecting a full quarter effect of continued lockdowns in China. For Q2, Taiwan, Hong Kong, Japan and India performed well during the quarter. On a year-over-year basis, Invisalign case shipments growth was strong in Japan, India, Taiwan, Thailand and Korea. The APAC teen case volume increased year-over-year, primarily driven by increased doctor submitters. Turning to new innovations, the Align Digital Platform is an integrated suite of proprietary technologies and services delivered as a seamless end-to-end solution to customers that connects all users, doctors, labs, patients and consumers to transform smiles, and change lives. Our technology advancements help our doctor customers deliver superior clinical outcomes, treatment efficiency, and also superior patient experience. In Q2, we introduced Invisalign Outcome Simulator Pro and Cone Beam Computed Tomography systems integration for ClinCheck software, building on several new innovations announced last quarter that we'll begin rolling out across the regions in August. Invisalign Outcome Simulator Pro is the next generation patient communication tool that empowers doctors to help patients visualize their potential new smile after Invisalign treatment. Using phase visualization in 3D dentition view, all done chairside in minutes. Cone Beam Computed Tomography systems, or what we call CBCT, integration for ClinCheck software is designed to deliver a complete view of a patient's roots, crown, and jawbone. CBCT integration for ClinCheck software enables doctors to confidently deliver a more informed Invisalign clear liner treatment plan for a wide range of cases. The user-friendly interface makes it easy for doctors to see their patient's root, crown, and jawbone in one automatically digitally fused 3D model. This allows doctors to tailor their treatment plan based on their experience and their patients' needs. CBCT integration for ClinCheck software gives doctors the control and confidence to expand treatment planning to a broad range of malocclusions, including surgical, restorative, expansion, extraction as well as teen cases with impacted or interrupted teeth. While it's still early in the commercialization of these new products, initial feedback from doctors is encouraging. We are excited to begin scaling them across our customer base in the second half of 2022. Also, during the quarter, we awarded 11 new research grants, totaling $275,000, to universities around the world. Through our annual research awards program, we help advance orthodontic and dental research, furthering our commitment to the future of digital orthodontics and restorative dentistry. Our consumer marketing is focused on educating consumers about the Invisalign system, and driving that demand to Invisalign doctors' offices, ultimately capitalizing on the massive market opportunity to transform 500 million smiles. For Q2, we had over 16.2 million visits to our websites, a 15% year-over-year increase, and delivered over 6.3 billion impressions. Both metrics were lower versus Q1 as we chose to right-size our media spending in Q2, given the macroeconomic environment. During the quarter, we built on our successful “Invis Is” multimedia campaign and launched in the US the next evolution with two new campaigns, “Invis Is” trauma-free, targeted at teens, and “Invis Is” when everything clicks, targeted at adults. Our “Invis Is” trauma-free campaign highlights the benefits of Invisalign treatment while humorously juxtaposing teens with the significant hassles involved with using braces. Our “Invis Is when everything clicks” campaign showcases Invisalign treatment, transforming smiles and the resulting confidence it gives to young adults. Both campaigns will be rolled out to markets around the world in Q3. About some of our consumer patient app My Invisalign continued to increase with 1.8 million downloads to date. The use of our four digital tools continues to increase; for example, the Invisalign virtual appointment tool was used over 12,000 times, and our insurance verification feature was used 36,000 times in Q2. Further, we received more than 91,000 patient photos in our virtual care feature globally, which continues to provide us with rich data to leverage our artificial intelligence capabilities and improve our services for doctors and patients. Additional consumer demand metrics are included in our Q2 earnings slides posted on our website. We are pleased with our Q2 Systems and Services revenues, which were up 5% sequentially and up 1% year-over-year. Q2 sequential growth primarily reflects higher scanner volumes in the Americas and APAC, and increased subscriptions. Year-over-year results primarily reflect increased scanner revenues in the Americas, offset by lower volume in APAC and EMEA. Growth of our iTero scanner installed base is driving an increase in services revenue. On a year-over-year basis, Systems and Services growth reflects increased service revenues from our largest scanner installed base, higher subscription revenues, and increased sales of scanners once leased. The number of intraoral digital scans used for Invisalign case submissions in Q2 reflect continued adoption of our digital scanners and our larger installed base. Total worldwide intraoral digital scans submitted to start an Invisalign case in Q2 increased 88.4% from 82.2% in Q2 of last year. International intraoral digital scans for Invisalign case submissions increased 84.4%, up from 76.2% in Q2 of last year. For the Americas, 91.4% of Invisalign cases were submitted using an intraoral digital scan compared to 87% in Q2 last year. Cumulatively, over 60.4 million orthodontic scans and over 12.6 million restorative scans have been performed with iTero scanners. Our Q2 exocad CAD/CAM products and services, which include restorative dentistry, implantology, guided surgery, and smile design offerings are included in our Systems and Services revenue. Exocad products and services are helping extend our digital dental solutions and broaden the Align Digital Platform towards fully integrated interdisciplinary end-to-end workflows. During the quarter, exocad released dental CAD 3.1 Rijeka, a new powerful lab software that saves design time and offers more intuitive workflows along the designs from CAD to CAM. Additionally, the exocad release launched the new myexocad portal, introducing mandatory end-user software use registration that for the first time allows exocad to collect information about who and how customers are using the software. This expands the opportunities for future product improvements. Also during the quarter, we signed a new long-term contract with exocad’s largest customer, Arming Gearbox, further strengthening our relationship. Finally, we continue to execute our strategy of geographic expansion. In June, our European manufacturing facility in Wroclaw, Poland, began manufacturing clear aligners for the EMEA region. Locally, for the first time, we also continued our operational expansion in Poland with our latest treatment planning facility. Our expanded operation in Poland supports Invisalign doctors in local languages, increases our flexibility and timeliness in supporting our doctor customers across the region, and we expect it will positively influence the quality and time of preparation of ClinCheck treatment plans and provide our doctor customers with the benefits of digital orthodontics with the Invisalign system. We are uniquely positioned with manufacturing and treatment planning in all three regions, and no other clear aligner manufacturer has our global footprint and capabilities. With that, I'll now turn the call over to John.

Thanks, Joe. Now for our Q2 financial results. Total revenues for the second quarter were $969.6 million, down 0.4% from the prior quarter and down 4.1% from the corresponding quarter a year ago. This is compared to Q2 2021 revenues of $1 billion, which had a year-over-year growth rate of 186.9%. For clear aligners, Q2 revenues of $798.4 million were down 1.4% sequentially, due primarily to product mix and unfavorable foreign exchange, partially offset by higher non-case revenues, and down 5.1% year-over-year, primarily reflecting lower volumes, unfavorable impact from foreign exchange and product mix shift, partially offset by higher additional aligners per order processing fees and higher non-case revenues. Q2 2022 Clear Aligner revenues were unfavorably impacted by foreign exchange of approximately $12.3 million, or approximately 1.5% sequentially, and approximately $32.9 million, or approximately 4% year-over-year. For Q2, Invisalign comprehensive ASPs decreased sequentially and increased year-over-year. On a sequential basis, the decline in comprehensive ASPs reflects higher discounts and unfavorable impact from foreign exchange, partially offset by higher additional aligners. On a year-over-year basis, higher comprehensive ASPs reflect the impact of higher additional aligners and per order processing fees, partially offset by the impact of unfavorable foreign exchange and higher discounts. Q2 Invisalign non-comprehensive ASPs increased sequentially and year-over-year. On a sequential basis, Invisalign non-comprehensive ASPs were favorably impacted by lower discounts, partially offset by product mix and unfavorable foreign exchange. On a year-over-year basis, higher Invisalign non-comprehensive ASPs reflect lower discounts, per order processing fees, and higher additional aligners, partially offset by the impact of unfavorable foreign exchange and product mix shift. Clear Aligner deferred revenues on the balance sheet increased $25.4 million, or 2.3% sequentially and $231 million, or up 2.5% year-over-year, and will be recognized as the additional aligners are shipped. Q2 2022 Systems and Services revenue of $171.2 million was up 4.7% sequentially, primarily due to higher scanner volume and ASP, and was up slightly by 0.8% year-over-year, primarily from higher services revenues from our larger installed base, partially offset by lower scanner volume and lower ASP. Systems and Services revenue were unfavorably impacted by foreign exchange of approximately $2.9 million, or approximately 1.7% sequentially. On a year-over-year basis, Systems and Services revenue were unfavorably impacted by foreign exchange of approximately $7 million, or approximately 3.9%. Systems and Services deferred revenues on the balance sheet increased $13.3 million, or 5.4% sequentially, and up $99.6 million, or 62.3% year-over-year primarily due to the increase in scanner sales and the deferral of service revenues included with the scanner purchase, which will be recognized ratably over the service period. Moving on to gross margin. Second quarter overall gross margin was 70.9%, down two points sequentially and down 4.1 points year-over-year. Overall, gross margin was unfavorably impacted by approximately 0.5 points sequentially and 1.1 points on a year-over-year basis due to foreign exchange. Clear Aligner gross margin for the second quarter was 73.3%, down 1.5 points sequentially due to lower ASPs and higher freight costs. Clear Aligner gross margin was down 3.6 points year-over-year due to a higher mix of additional aligner volume, higher freight, and manufacturing spend, partially offset by higher ASPs. Systems and Services gross margin for the second quarter was 59.8%, down 3.6 points sequentially due to higher manufacturing variances and freight costs, partially offset by higher ASPs. Systems and Services gross margin was down 6.1 points year-over-year due to lower ASPs and higher manufacturing variances, partially offset by higher service mix. Q2 operating expenses were $499.4 million, down sequentially 2.3%, and up 2% year-over-year. On a sequential basis, operating expenses were down by $11.9 million mainly due to lower incentive compensation and controlled spend on advertising and marketing as part of our efforts to proactively manage costs. Year-over-year, operating expenses increased by $9.7 million, reflecting our continued investment in marketing, sales, and R&D activities and investments commensurate with business growth. On a non-GAAP basis, excluding stock-based compensation, amortization of acquired intangibles related to certain acquisitions and acquisition costs, operating expenses were $466 million, down sequentially 3% and up 1% year-over-year. Our second quarter operating income was $188.2 million resulting in an operating margin of 19.4%, down 0.9 points sequentially and down 7.2 points year-over-year. Operating margin was unfavorably impacted by approximately 1.1 points sequentially due to foreign exchange. The year-over-year decrease in operating margin is primarily attributable to lower gross margin, investments in our go-to-market teams and technology as well as an unfavorable impact from foreign exchange by approximately 2.4 points. On a non-GAAP basis, which excludes stock-based compensation, of intangibles related to certain acquisitions and acquisition costs, operating margin for the second quarter was 23.3%, down 0.7 points sequentially and down 6.5 points year-over-year. Interest and other income expense net for the second quarter was a loss of $14.6 million, down sequentially by $4 million and down year-over-year by $14.5 million, primarily due to larger net foreign exchange losses from the weakening of certain foreign currencies against the US dollar. The GAAP effective tax rate in the second quarter was 35% compared to 28.4% in the first quarter and 25.7% in the second quarter of the prior year. Our non-GAAP effective tax rate was 25.6% in the second quarter compared to 24.2% in the first quarter and 19.5% in the second quarter of the prior year. The second quarter GAAP effective tax rate was higher than the first quarter effective tax rate primarily due to foreign income tax at different rates and lower excess tax benefits from stock-based compensation. Second quarter net income per diluted share was $1.44, down sequentially $0.26 and down $1.07 compared to the prior year. Our EPS was unfavorably impacted by $0.26 on a sequential basis and $0.42 on a year-over-year basis due to foreign exchange. On a non-GAAP basis, net income per share was $2 for the second quarter, down $0.13 sequentially and down $1.04 year-over-year. Moving on to the balance sheet. As of June 30, 2022, cash, cash equivalents, and short- and long-term marketable securities were $977.2 million, down sequentially $143.4 million and down $109.2 million year-over-year. Of our $977.2 million balance, $251.4 million was held in the US, and $725.8 million was held by our international entities. Q2 accounts receivable balance was $931.9 million, down approximately 2% sequentially. Our overall days sales outstanding were 85 days, down approximately two days sequentially and up approximately 13 days as compared to Q2 last year. Cash flow from operations for the second quarter was $127 million. Capital expenditures for the second quarter were $76 million, primarily related to our continued investments to increase aligner manufacturing capacity and facilities. Free cash flow, defined as cash flow from operations less capital expenditures, amounted to $51 million. In Q2, we purchased $200 million of our common stock through an accelerated stock repurchase program, receiving approximately 757,000 shares at an average price of $264.37 per share. We are over halfway through our May 2021 $1 billion repurchase program, and have approximately $450 million remaining available for purchase. Now turning to full-year 2022 and the factors that influence our views on our business outlook. Overall, our Q2 results were solid, and we feel good about the execution across the business, especially in an increasingly challenging global economic environment. Delivering revenues and volumes relatively unchanged from Q1 and down only slightly year-over-year despite unfavorable impacts from foreign exchange speaks to the strength of our underlying products and services and the size of our market opportunity. We remain confident in the huge underpenetrated market for digital orthodontics and restorative dentistry, our technology, our industry leadership, and our ability to execute and make progress towards our long-term model of 20% to 30% revenue growth. We also remain committed to our goal for fiscal 2022 to deliver GAAP operating margins above 20%, while making strategic investments in sales, marketing, R&D and operations, notwithstanding the impact from unfavorable foreign exchange, which was not factored into our operating margin guidance for the full year. Capital expenditures primarily relate to building construction and improvements as well as digital manufacturing capacity to support our international expansion. For 2022, we expect our investment in capital expenditures to exceed $300 million. This includes our investment in our aligner fabrication facility in Wroclaw, Poland. In times like these, our strong fundamental business differentiates Align, and we are grateful to have a profitable underlying business model that generates strong cash flow, as well as a healthy balance sheet that provides flexibility to invest in our growth while supporting our employees, customers, and shareholders. As we move into the second half of the year, we will continue to manage our investments to account for headwinds and uncertainty while focusing on successfully delivering on our strategic growth drivers. With that, I'll turn it back over to Joe for final comments.

Thanks, John. Closing Q2 in the first half of 2022 has proved to be tougher than we expected. As we continue to navigate macroeconomic uncertainty and weaker consumer confidence and impacts related to COVID-19 variants, we cannot lose sight of the strong fundamentals of our business and the enormous market opportunity for digital orthodontics and restorative dentistry. The decisions we make this year will have lasting strategic implications for the future of our industry and the competitive landscape. We are holding true to our business strategy, and making good progress in a very difficult operating environment. We remain committed to balancing investments to drive growth and long-term strategic priorities with near-term headwinds while acting with a sense of urgency to ensure that we're ready to capitalize and extend our global innovation leadership as growth resumes. Thanks for your time today. We look forward to updating you on our next earnings call. With that, I'll turn it over to the operator.

Thank you, good afternoon. Hey, Joe and John. I guess I wanted to start high level. Joe, you kind of highlighted the consistent case and revenue trends in the second quarter relative to the first. But within the context of a challenging macro environment, I guess, how does that influence your thinking on the trajectory of the business? And have you seen an impact on patient traffic to dental practices or treatment acceptance rates that's kind of driving that commentary?

Nate, from a domestic perspective, there are some signals to consider, but for a demand question like yours, it's important to look at the global picture. John and I mentioned in our introduction that COVID-19 had a significant impact on us in Asia. In Japan, it affected us during the early part of the quarter, while in China, it persisted throughout. This situation makes it difficult to discern demand signals. In the United States, our data shows some stability in patient visits from a general practitioner standpoint. However, we are concerned because our products, such as caps, crowns, or cleanings, are somewhat discretionary. We see more variability in adult selections compared to teens, who have remained relatively stable. In Europe, we are comparing against a year when we experienced 300% growth, which is a considerable benchmark. Additionally, there were no standard vacations taken in Europe at the start of the second quarter and into the third. Overall, I feel positive about the demand patterns from Q1 to Q2, but I cannot provide a clear outlook for the third and fourth quarters due to macroeconomic factors and ongoing COVID concerns in China. I hope that clarifies things, Nate.

Yes, definitely. Can you provide some insight into the impact of the lockdowns in China? Specifically, have you noticed any recovery in volumes now that those lockdowns are starting to ease?

For sure. I mean it's direct correlation there as soon as they let Shanghai open again, we saw it reflected in our order rates there. And look, we continue to feel good about China in a stable market. It's just the dramatic way that China continues to address COVID cases by major cities. This just creates a huge amount of uncertainty as to when the next lockdown will be.

Hi, guys.

Hi, Elizabeth.

Thank you for the question. I would like to know if you could discuss the increase in sales hiring that occurred in the fourth quarter of last year and the first quarter. Can you share the impact of these new salespeople, their current progress in the ramp process, and how we should view their potential contributions in the latter half of the year? Thank you.

That's a good question, Elizabeth. Our direct sales force is really important to us. We hire a lot of salespeople right at the beginning, and we also have sales training programs to help them get started in the company. Depending on the location, there is a six to nine-month period where they are getting up to speed. They need time to understand the Invisalign system, the digital platform, and other aspects. In simpler geographical situations, it may take six months, but generally, it takes about nine months before we have confidence that they will be effective when communicating with our doctors.

Got it. That's helpful. One thing that concerned me a bit this quarter was the performance among teens. I know that this quarter's results may have been affected by COVID in terms of seasonality, and it is not typically the strongest quarter for teens. How do you view that in relation to the economic sensitivity of adult cases, and what are your expectations for that trend in the near term?

Yes. Keep in mind, we see a lot more concern from an adult standpoint when you look year-over-year in the sense of our order growth in adults. I mean it's been affected, Elizabeth, and there's a lot of data that we produce that will show you that. On the teen side, it's hard to pull a lot of the second quarter because it really starts in the third quarter. But I felt overall good about it, but again, not surprised because we've always felt that teens have a certain window of time from a treatment standpoint. And so it's not necessarily an emotional purchase in a way; it's usually planned for and anticipated. What we saw between the second quarter and the beginning of the third quarter really bears that out.

Got it. Okay. Thank you very much.

You’re welcome.

Great. Thanks, guys. Good afternoon. I'll follow up on teen, maybe just to go there. I think worldwide teen was down year-over-year. And I believe, Joe, you mentioned that teen and APAC was up year-over-year, which sort of implies that North American teen was down maybe a decent amount. So anything to call out there? Why do we see that maybe specific to North America? And then more importantly, you did have some positive commentary around teen case packs, you talked about enrollment. So maybe just talk to us on how long it might take for the teen case pack program in North America to give that segment a shot in the arm and then your plans to roll that out internationally? I've got a follow-up.

Jon, regarding the teen segment, we did experience a subdued response last year compared to pre-COVID levels. This year, we are optimistic about a more positive trend emerging. However, I caution against drawing strong conclusions from the differences between the first and second quarters. There are also ongoing competitive pressures from other clear aligners, but our main competition remains with traditional braces. We're pleased with the reception of our new teen packs, particularly among lower-end orthodontists who are less experienced with teen cases. This is a target market we aim to support and build confidence within. While we are not claiming success yet, we believe our product is well-timed. The trends in the teen market are not aligning with those in the adult market. By the end of the third quarter, we should have a clearer picture of our progress, but I did not find any alarming signs between the first and second quarters.

Got it. Helpful. Thank you. And then for my second one, let me try to maybe jam two in one, and hopefully not make a mess of it. So just for us on the 3Q versus 2Q overall case volumes, China is reopened. China is a decent chunk of business for you guys. So if China snaps back, you talked about Shanghai, then maybe talk to us on why we wouldn't see you guys resume some sequential growth 3Q versus 2Q? I know there's many other markets. And then maybe just to stick with China. I just love your thoughts on what's going on over there, maybe in terms of market share, your main competitor had some quasi numbers out recently. It looked like they were down mid-single digits in cases 1H 2022 year-over-year, which quite honestly, I actually thought that was a good number considering the environment. So I would love your thoughts on just China and your ability to hold share on what's going on from a market share perspective? Thanks guys.

I'll start with China and then go back to other points. From what I observed in the published figures, our experience aligns with those findings. We faced a shutdown in Shanghai and slowdowns in other areas, but nothing really surprised me in those numbers. I am confident about our ability to compete in China. Our investments in treatment planning and manufacturing have only increased, improving the efficiency of our operations. Our product is well-suited for this market, which also has some of the toughest cases we handle. I believe we can compete effectively, but we need a stable environment to operate in, which has been absent for nearly two years. I recently saw that Wuhan is considering another shutdown, highlighting the ongoing uncertainties with COVID and its impact on the market, especially in the latter half of this year. If the situation stabilizes, I believe we will perform well in China during that period. Overall, I'm positive about our competitive position and our ability to compete against anyone in the market.

And we should see some of the sequential history that we normally see in our business. It goes to what Joe said that there's just some unforeseen variables that are still there. If there is a shutdown in China, that will impact our numbers. If there's no shutdown, we should see sequential improvement. And then you have some of the other macro economics that we've talked about in terms of potential recession or other things that people are concerned about, which affects their decisions on whether they go into treatment. But we're watching closer to see how sequentially things are behaving and making investments appropriate based on what we see.

And Jon, sorry, just staying back to your second question...

Sorry. if I can just jump in...

Go ahead, Jon.

Sorry, Joe. I was just going to say, John and Joe, maybe to follow up on that last comment just for clarity purposes because I think it's an important one. Are you guys saying sort of as you sit here today, who the heck knows what's going on with Wuhan, I don't know, something worse incrementally with the economy. But as we sit here today in late July, you're expecting the resumption of sequential growth off the Q2 number, this evening?

I would say, Jon, expecting anything in this market might indicate a lack of understanding. Considering the situation in China, I can't confidently predict a stable market in the second half due to their COVID policies. From the perspective of the United States, there is a lot happening as we try to understand the overall teen market outside of China, which seems to be the most stable market we have and where we’re prepared to compete. As we move into a seasonal period, that makes a significant difference. We are well-positioned with our products. However, as you know, Jon, this has always been a wires and brackets marketplace. We have been gaining market share by 1.5 to 2 points a year, and we hope some of our upcoming initiatives will improve that, but we will have a clearer picture after the third quarter concludes.

Okay. Very helpful. Thanks, guys.

Thanks, Jon.

Thank you. Good afternoon, everyone. Joe, I wanted to discuss the shift in the doctor numbers this quarter. It has trended down over the past few quarters, but this quarter in the Americas, it did see a slight increase. What are your thoughts on this? Does it indicate a stabilization in the market, or perhaps in competitive positioning? How do you perceive this number in the Americas? Is there still potential for growth in the Americas over the next couple of years, or have we reached a point of saturation with the number of doctors performing these cases?

Just to answer your last part of your question first, Jeff. No, we have a lot of room to grow in the Americas, too. In the United States, Canada, but also you have to throw in Latin America and Brazil in that. There's a lot of growth, John and I have ported over these numbers a lot. You know what happens, if you backed these numbers up before really the big surge in orders that we had before, we can draw a line through these things. It doesn't upset us. You have to split orthos and GPs very clearly. Remember, you have some GPs that do like three cases a year. As things kind of slow down, they'll be out of the circulation for a while and then they order another and whatever. And these numbers will go up 81, 1,000, 2,000, we'll see them go up and down. But don't look at this in any way as that we're saturated in this marketplace, both from an orthodontic and GP standpoint. Jeff, the other thing too, I think, that people forget from an orthodontic standpoint is that our orthodontists who do teens. These are orthodontists that are really committed to Invisalign for the most part, and they do a lot of teens. But we still have a significant amount of orthodontists that do Invisalign almost exclusively for adults. And so you'll see that whole piece from a utilization standpoint as we increase our team penetration, you should see the utilization rates there improve.

Yeah, that's helpful. And then maybe kind of a follow-up on all that a two-parter, just the international number again, kind of, did tick down a little bit that number of factors shipped to internationally. One, I would assume you think there's a lot more room even there to saturate that market over the next few years, that would seem to make sense to me anyway. But is there any way to look at what that number did in China? And was there a sequential decline largely driven by the shutdowns in China, or ex-China, would that number have been up? And then I was a little surprised to hear cases down, I think you said in the UK year-over-year. Is that just a tough comp, or what's going on in the UK? I think we are all aware of China pressures in early, Japan pressures or early quarter Japan pressures, but UK caught me off guard a little bit there? Thanks.

I'll answer the UK piece first. The UK was outstanding for us last year. Remember, Europe grew 300% for us last year, Jeff, right? The UK led that. So I'm sure that UK number is higher than what that aggregate number is. And so what you're seeing is adult retrenchment in the UK from an order standpoint, but not an indication of a utilization issue that I'd say, across the doctor base that we have in the UK. John, I don't know... : And just on the China piece or the APAC piece for international. So that was certainly an impact in terms of the lockdowns, and doctors just not being able to transact and therefore, don't have ship to. So the international side of the doctor shipping was certainly impacted by COVID. We won't break it out by the sub-regions. But that was an impact that, look, as those offices open up, as those lockdowns are minimized, we would expect that to increase from a ship-to-stand.

Thanks guys.

Yeah. Thanks Jeff.

Hi, good afternoon. Can you just touch on your sales and marketing spending strategy a little bit in the short-term and longer term? I guess, when can you decide to flip the switch?

You mean flip the switches as far as up or down?

Yeah, yeah.

Yes. I mean, obviously, obviously, we saw our adults dramatically decrease and so the return on investment in some specific geographies. John, as I take a look at it, and we don't eliminate it, but we reduce it in accordance with what we think the demand pattern is. And we spread it around into other countries that we feel we can get a higher return on. And we just basically size our advertising to what we think the demand patterns are around the business in different areas. And so I wouldn't look at this as any way that we'll continue to advertise aggressively and promote our brand and to drive value in our change to bring customers to our doctor base, but we can be responsible to we can advertise at the rate that we did last year when we were growing at over 100% in a lot of these regions, we have to modify it somewhat in order to address that demand pattern.

And we adjust into the market. So keep the overall brand awareness, keep that averages. Remember, still sudden spending even as we right-size things, hundreds of millions of dollars in marketing and media to be able to go to market, drive that awareness. But then in certain markets, if there's COVID or if there's economic concerns and so on, we're adjusting things to make sure that we right-size and continue to make sure that we make the right trade-off between how we're investing in go-to-market, and continue to reinvest in the rest of the business like R&D and operations.

Got it. That's very helpful. And I guess just pivoting to a more sort of higher-level question. Any update on commercial operations in sort of your emerging markets like Brazil, India, Africa, what would you say current penetration levels are over there? And I guess, realistically, how much revenue can you capture from those regions in the next, let's say, five to 10 years?

The regions you mentioned are significantly underpenetrated, presenting a huge opportunity. We have seen substantial progress in Brazil and good progress in India. Regarding the 500 million patients we refer to, they are out there, and our strategy involves placing salespeople and the right capabilities on the ground. A direct sales force is essential to effectively sell our product line. To directly address your question, the current penetration rates are far from where they could be. This is evident in our data, and it reaffirms our confidence that in a stable environment, we will continue to perform strongly.

We are designed as a company to expand into those markets. We have a global manufacturing presence in all three regions. We offer treatment planning and have a strong direct sales force with excellent products. We are well-positioned in all these markets and are optimistic about the dynamics, such as a growing middle class and large populations. There are many individuals seeking teeth straightening solutions, and we provide an effective way for them to achieve that. The markets you've mentioned, along with many others, are key areas for our investments due to the strong returns we anticipate.

Got it. Thank you very much.

Thank you.

Hi, Jason.

Hey, good afternoon. Yes. So Joe, I'll go big picture here in the US market, and maybe go back to clarifying point on Jon Block's question earlier. On one hand, demand in the category broadly just did seem to show some signs of moderation in the second half of last year, in relation to a bit of a leading indicator in other parts of high end. Then on the help of the average consumer. I mean this needs are going to be coming into some easier absolute comparisons as we head into the back half of this year, which I don't know, maybe helps reverse this downtrend in Invisalign case growth. But I guess we're also in the early days of what still could be some more pain coming for the consumer. So I guess what dominates in your opinion? Do the easier comps dominate, or does it more challenge on consumer dominates? And again, just thinking about the domestic market and ignoring again some of that China and predictability that's out there.

Yes. I'll let John take a shot at this too. But I would say, I mean, obviously, you talk about easier comps. I mean when you're comping against 300% growth, like we just talked about, it's one of the tougher comps on a large number I've had in my business career. And so obviously, when you get some light on that line, it helps somewhat. But consumer confidence. I'd say, outside of the COVID, the way I'd look at the business again is COVID affected Asia in a big way. We had some COVID staffing issues or whatever, but predominantly in the West, it's consumer confidence that we look at. And so those consumer confidence numbers start to equalize to start to get better. Some of the ones we look in Europe are all-time lows. I feel that means a lot. It means that means more to me in those comparisons years from here. We report more confidence in consumers in a trend where in that kind of environment, we think we see the adult cases resume at a pace that would be equal to our long-term growth rate.

Yes. It's consumer confidence overall, and in certain cases…

I was mainly focusing on the US market. I completely understand the dynamics in Europe, China, and APAC. However, regarding the US market, the absolute comparisons have become easier, as they began to decline starting in the second half of last year. So, I'd like to focus my question there. Sorry for the interruption.

Yes, Jason, that's fine. When I look at the United States, I focus on consumer confidence more than anything else. It's not just about potential COVID variants or any significant issues; we all have residual concerns from what we've experienced over the last two years. I do appreciate the year-over-year comparison, as it will be beneficial. The consumer confidence figures, whether regarding Europe or the U.S., are particularly telling for our market, especially in the adult sector that we target, including both the GP segment and the orthodontic market.

And the piece that I would add to the US is just that as we get into teen season now as we go from Q2 to Q3. Teens will be important to see. We've got great products. We've got great go-to-market opportunities to be able to grow in those markets and get more market share. When we think of teens everywhere in the world, it's single digit and even in the US. So we look at growth opportunities that will be teens, maybe a little bit less of more resistant to maybe some of that consumer concerns that they have. Consumer concerns certainly show up on the adult side, but we think teens can help offset that just a bit because it's less discretionary.

Okay. That's helpful. I have a quick follow-up. There are many questions from investors regarding the impact of decremental margin on the business as volumes and revenue change. You have increased headcount significantly and expanded branding and advertising efforts during the pandemic, which has broadened your competitive advantage, and that’s impressive. However, it seems some of that marketing has been adjusted. Are there additional changes needed in the operating expense structure in this environment? Also, what would trigger the decision to implement further rightsizing?

When I hear the term rightsizing, it suggests we've had layoffs, but we haven't let anyone go. We typically hire to accommodate a growth rate of 20% to 30%. Our operating expense is also aligned with that range. Since we couldn't hire at that level, if you want to label it a cutback, then it reflects a reduction from our usual operating expenses. We usually aim to balance operating expenses with revenue at about 50%, and there are several factors to consider from an operating expenses perspective. Our priority areas are our commercial team, engineering efforts, and marketing, which are vital to our success. We focus on these areas and manage the business effectively. John, do you have anything to add?

It's a balance, both short and long-term. So as we balance out our plans, we look to the growth opportunities we have, we want to make sure we continue to invest in those growth opportunities. But then obviously, we have to be mindful of the current conditions that we're in, and we'll adjust as needed to still maximize the return on investments that we're making.

Great, thank you. I wanted to ask another question related to the Americas teen segment. Considering the seasonality and the visibility in this area, could you clarify whether we can expect a significant sequential increase in the upcoming quarter, or is there a reason why that might not occur? This seems to be an area where you should have more control. Thank you.

Our typical growth trend from the second to the third quarter is generally stable or may decline slightly by about one percentage point. John can verify this. The transition from the second to the third quarter is largely influenced by the teen segment, though other areas of our portfolio help balance this out. It's not usual for us to see a significant increase during this transition. However, we are concentrating on the teen market since we believe it is less affected by changes in consumer confidence compared to adults. I want to emphasize that this is a long-term strategy we have been developing for years. We have launched several new products, including Invisalign First and other teen-focused offerings that support our efforts. The new teen packs are also beneficial. We believe we are well positioned, but we need to observe the market closely as we enter the quarter to evaluate its performance. John, do you have anything to add?

But specifically in the US, US teen, we should see sequential improvement as we get into teen season, going from Q2 to Q3, notwithstanding any occurrences that happen from an economic standpoint. But the expectation is given our products, given the opportunity, given the utilization that we have, we should be able to see growth. Notwithstanding anything else that gets in our way.

Okay. Thanks. And then ASPs for the balance of the year, how should we be thinking about that and the FX impact?

Erin, FX, obviously, Q1 to Q2 was a big impact from FX. We see it in the numbers from revenue all the way down to our EPS. I would think of it's tough to forecast where FX is going to go. Certainly, the dollar has strengthened. I think you kind of take the numbers that they're at now and kind of play that forward for the rest of the year is how we look at that. I think from an overall ASP standpoint, there's always going to be puts and takes. So we're not doing anything different from a discounting standpoint, how we're going to market and so on. You might have some mix effects that come through. But I take the FX rates kind of as they are now, project those forward and then ASP should be too much different than what you see now notwithstanding any FX.

Thanks, John, a quick follow-up on that FX question. I appreciate all the details in the deck. It is very, very helpful. Just curious, what is the estimated impact of currency on the operating margin for the year now in the ballpark?

Well, ballpark, I would look at that as about 1 point, maybe just over 1 point of impact. We saw that 1.1 point impact from Q1 to Q2 in op margin. I would kind of look at the full year and about the same.

Thanks. And then Joe, on the scanner business, any color between the North American segment and international in terms of growth rate, how would you sort of characterize the capital spending environment in those two regions, specifically?

Yes. I'll start by noting that we faced challenges selling scanners in China due to the shutdowns there, which is significant since China is one of our largest markets, alongside Japan and the broader Asia region. I don't view this as a general market issue, but rather a problem specific to COVID. I remain hopeful that if COVID remains under control, the situation will resolve itself. In the United States, our team has done a great job, and we are seeing strong demand, particularly for the 5G scanner, which is proving to be very popular. On the restorative side, dentists are appreciating the near-infrared technology for caries detection, and orthodontists continue to value the precision of our iTero workflows. I feel positive about our performance in the Americas, especially with services now making up 40% of our large installed base, which benefits the overall business. I'm also optimistic about our scanner performance in Europe, although we achieved significant numbers last year, and the year-over-year comparison may not reflect that perspective. However, Europe is currently facing additional pressures due to the situation in Ukraine, which affects consumer sentiment and may make doctors more hesitant. Still, I am confident in our standing in the European scanner market, and as the market stabilizes, I believe our business will pick up again.

Okay. Thanks.

Hi, thank you for having me. I want to understand what it would take for you to feel comfortable providing guidance again or for you to believe you can achieve your long-term targets rather than just making progress toward them. Do we need to see consumer confidence rise above 99% again, or at the start of the year, you mentioned that if there are no more COVID outbreaks, you could still meet your goals? What specific indicators do you need to see before you can come back to us and say you’re back on track or that you believe you can reach your targets? We want to feel assured that you can grow at a certain rate moving forward and even potentially provide guidance for a specific quarter, even if not for the entire year. What do you think needs to happen?

I'll hand it over to John. However, please remember that we do not hold inventory in this business, except for scanners. This is a real-time operation, and we have minimal inventory to consider on a week-to-week basis. I'll pass it to John now, but keep in mind that we tend to notice these trends early from both directions. As the economy improves, we will likely feel the impact first, and similarly, we will sense a downturn early due to the nature of the business.

It really comes down to, Kevin, more just having more predictability on a macro basis, understanding you mentioned COVID and thinking that we're through it, then you have China lockdowns or some of the consumer sentiment and things that come up that are outside of our control. We feel very good about being able to control what we can control, making the right investments as we go to market or adding investments in R&D to better our products and so on, and drive that return. And therefore, like I said, we can manage that 20%, that’s something that we can manage as we go through the quarter. It really comes out to having more predictability on a macro basis. And once we get confidence in that, and we work our way to that understanding, look, the economies are going to do what they're going to do. They're going to go up or down. But if I have more predictability on the direction that they're going and how they’re going to go, then we can give a good forecast.

Thank you for the question. I want to follow up on previous discussions, particularly regarding the ongoing situation in China and its impact on consumer confidence. While we have talked about potential improvements, I want to address the other side, particularly in light of inflation and how consumer sentiment might be affected. If unemployment increases and job losses escalate, there is a possibility that conditions could worsen over the next few quarters before they improve. Can you share your perspective on the likelihood of this scenario occurring and the potential impact on the business? Also, what strategies do you have in place? You mentioned cost control earlier; what other measures would you consider if consumer conditions in the Americas and Europe deteriorate significantly in the coming months?

It's Joe. I believe we have been responsible in adjusting the business to a lower demand than we are accustomed to. You might recall how we responded similarly when COVID hit in March 2020 and managed the business during that time. If conditions worsen, and they may, we will approach it from an economic perspective. Both John and I have experience in navigating such cycles, and we know how to operate during downturns. While we are a growth business and will continue to view ourselves that way, we are also committed to adjusting our operations based on the prevailing economic conditions.

As a result, we've been able to make these adjustments. We're fortunate as a company to have a strong cash position and balance sheet. Ultimately, we have a significant opportunity for growth, but there are challenges in our way. As Joe and others have mentioned, conditions could deteriorate. We need to balance these short-term difficulties with our long-term goal of making Invisalign the standard of care. This balance is our current focus, and it will unfold over the next year to 18 months as circumstances evolve. We are hopeful that the economy will improve and that these challenges are temporary. When conditions do improve, we are well positioned to grow within this market, but we must remain grounded in the current realities.

Great. And a quick follow-up, if I can. On 1Q, you kind of gave some comments on pacing through the quarter, and gave some comments on April as it relates to March. Kind of get the sense that things probably slowed down at the end of 2Q or bit in June, both between FX and China lockdowns being worse. Any sense you can give on sort of the progression through the course of 2Q? And just any early signs you've seen from July, again, realize that walk-down in China and FX is playing a big role. But maybe if you could just focus on America's trends through the quarter, and July. That will be helpful.

Yes, that's a great question. When looking at the overall picture, you can see the effects of foreign exchange rates and their fluctuations. When we address the COVID lockdowns, especially in China, we did experience some impact. This was evident in both the first and second quarters. In any area where there is a lockdown, we notice a decrease in volume. Once those restrictions are lifted, we begin to see a recovery in volume. Regarding China, as the situation transitions from lockdown to normalcy, it presents a positive shift for us as we witness some volume resurgence. Concerning the US, it appears that things might be stabilizing somewhat. The trends seem to mirror what we observed as we moved from Q2 into Q3. Additionally, we anticipate that the benefits from our products and programs targeting teens in the US and other locations will be advantageous for us as we progress from Q2 to Q3.

Okay. Thanks.

Thank you, operator, and thank you, everyone, for joining us today. We look forward to speaking to you at upcoming financial conferences and industry meetings. And if you have any follow-up questions, please contact our Investor Relations team. Have a great day.